Business Taxes, General Tax Topics, Self Employed, Small Business, Tax Deductions, Tax Planning, Tax Reduction, Uncategorized

Starting a New Business with employees? Get Up to $100,000 in Tax-Free Money from the IRS!

In our Chicago South Loop tax preparation office, and our Homewood Il, tax preparation office, we have been creating a lot of small businesses. If you’ve listened to the news, or saw anything on social media, then you likely already know that the employee retention credit (ERC) is a good deal—if you qualify. Now, thanks to the recently enacted American Rescue Plan Act of 2021 (ARPA), you can qualify for up to $100,000 of ERC in the third and fourth quarters of 2021 if you:

1.) begin the business after February 15, 2020 (you could start today),
2.)have average annual gross receipts of $1 million or less, and
3.) do not meet either of the ERC tests—the suspended operations test or the gross receipts test—in
place before ARPA was passed.

Finding the $100,000

When you meet the three requirements above, you qualify as a recovery start-up business and, as such, can claim an ERC of up to $50,000 in both the third and fourth quarters of 2021. It works like this: your recovery start-up business ERC is equal to 70 percent of the qualified wages paid to each employee (up to $10,000 per employee per quarter), with an overall maximum credit of $50,000 per quarter.

Recovery Start-Up Business Example
In April 2021, you start a new retail store as a sole proprietorship business. You project your gross receipts to be as follows:

Second quarter—$50,000
Third quarter—$60,000
Fourth quarter—$100,000

In addition, you hire three full-time sales staff whom you pay hourly. Each earns $2,800 in wages each month. For the fourth quarter, you hire an additional part-time salesperson and pay that person a total of $4,000 in November and December 2021. Your proprietorship business qualifies as a recovery start-up business and is eligible for the ERC in the third and fourth quarters of 2021.

For the third quarter of 2021, your total ERC is $17,640: You have three employees who were paid $8,400 each during the quarter. No employee exceeds the $10,000 wage maximum for the quarter. Total qualified wages for the ERC are $25,200 ($8,400 x three employees). Your credit is 70 percent of $25,200, or $17,640.

No employee exceeds the $10,000 wage maximum for the quarter.
Total qualified wages for the ERC are $25,200 ($8,400 x three employees).
Your credit is 70 percent of $25,200, or $17,640.

For the fourth quarter of 2021, your total ERC is $20,440:
You have three employees who were paid $8,400 each during the quarter, and one employee who was paid $4,000 during the quarter. No employee exceeds the $10,000 wage maximum for the quarter. Total qualified wages for the ERC are $29,200 ($8,400 x three employees + $4,000 for the part-time employee). Your credit is 70 percent of $29,200, or $20,440. For tax year 2021, you receive total employee retention tax credits of $38,080.

One Wrinkle But you need one more step to calculate your net benefit. You can’t deduct wages in tax year 2021 equal to the ERC earned during the tax year; therefore, your net business income increases by $38,080 for tax year 2021.
If you pay a federal and state income marginal tax rate of 27 percent on that income, you’ll pay extra tax of $15,663: $10,282 in federal and state income taxes,4 and $5,381 in self-employment tax. Net result. You have $22,417 more in your pocket this year from claiming the ERC. That’s a nice leg up for a business that started in April 2021.

But you need one more step to calculate your net benefit. You can’t deduct wages in tax year 2021 equal to the ERC earned during the tax year; therefore, your net business income increases by $38,080 for tax year 2021. If you pay a federal and state income marginal tax rate of 27 percent on that income, you’ll pay extra tax of $15,663: $10,282 in federal and state income taxes,4 and $5,381 in self-employment tax. Net result. You have $22,417 more in your pocket this year from claiming the ERC. That’s a nice leg up for a business that started in April 2021.

Takeaways

ARPA added a big incentive for starting a new business. It works like this: your business can qualify for the ERC on 70 percent of the qualified wages paid to each employee (up to $10,000 per employee for each of the last two quarters of 2021), with an overall maximum credit of $50,000 per quarter.

To qualify for the third- and fourth-quarter ERC incentives, your business had to begin after February 15, 2020. The big deal with the two quarters of 2021 is that your business has to be new, but it does not have to suffer from COVID-19 stresses. In fact, it can’t qualify for the recovery start-up business special deal if it otherwise qualifies under the suspended operations test or the gross receipts test.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth. Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!
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Congress Reinstates Expired Tax Provisions—Some Back to 2018

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Congress let many tax provisions expire on December 31, 2017, making them dead for your already- filed 2018 tax returns.

In what has become much too common practice, Congress resurrected the dead provisions retroactively to January 1, 2018. That’s good news. The bad news is that we have to amend your tax returns in our Chicago south loop tax preparation office to make this work for you.

And you can relax when filing your 2019 and 2020 tax returns, because lawmakers extended the “extender” tax laws for both years. Thus, no worries until 2021—and even longer for a few extenders that received special treatment.

Back from the Dead

The big five tax breaks that most likely impact your Form 1040 are as follows:

  1. Exclusion from income for cancellation of acquisition debt on your principal residence (up to $2 million)
  2. Deduction for mortgage insurance premiums as residence interest
  3. 7.5 percent floor to deduct medical expenses (instead of 10 percent)
  4. Above-the-line tuition and fees deduction
  5. Nonbusiness energy property credit for energy-efficient improvements to your residence

Congress extended these five tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020, so you’re good for both 2019 and 2020.
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Other Provisions Revived

Congress also extended the following tax breaks retroactively to January 1, 2018, and they now expire on December 31, 2020 (unless otherwise noted):

  • Black lung disability trust fund tax
  • Indian employment credit
  • Railroad track maintenance credit (December 31, 2022)
  • Mine rescue team training credit
  • Certain racehorses as three-year depreciable property
  • Seven-year recovery period for motorsports entertainment complexes
  • Accelerated depreciation for business property on Indian reservations
  • Expensing rules for certain film, television, and theater productions
  • Empowerment zone tax incentives
  • American Samoa economic development credit
  • Biodiesel and renewable diesel credit (December 31, 2022)
  • Second-generation biofuel producer credit
  • Qualified fuel-cell motor vehicles
  • Alternative fuel-refueling property credit
  • Two-wheeled plug-in electric vehicle credit (December 31, 2021)
  • Credit for electricity produced from specific renewable resources
  • Production credit for Indian coal facilities
  • Energy-efficient homes credit
  • Special depreciation allowance for second-generation biofuel plant property
  • Energy-efficient commercial buildings deduction

Temporary Provisions Extended

Congress originally scheduled these provisions to end in 2019 and now extended them through 2020:

  • New markets tax credit
  • Paid family and medical leave credit
  • Work opportunity credit
  • Beer, wine, and distilled spirits reductions in certain excise taxes
  • Look-through rule for certain controlled foreign corporations
  • Health insurance coverage credit

If you have questions about the extenders, please call us at 855-743-5765. Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance
assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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Unlock Tax Deductions with a Rental Property Home Office

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With the start of a new tax year, you’re probably looking for new tax savings opportunities, like our Chicago South Loop Tax Preparation clients.

As you probably know, establishing a home office for your Schedule C or corporate business creates valuable tax deductions.

But it’s not available only for your proprietorship,partnership, or corporate business. If you have rental properties, you can establish a home office to manage your rental properties and deduct the cost on your Schedule E.
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Rentals as a Business

The first hurdle is that your rental activities have to qualify as a “trade or business” under the tax law.

Luckily for you, that’s relatively simple—you’ll need regular and continuous involvement with your rental activities to meet this requirement.

Whether or not your rental activities are a trade or business depends on the facts and circumstances of your particular situation, and tax court cases give us guidance on that.

Qualifying Area

Your second hurdle is setting aside space in your home that qualifies for the home-office deduction.

For this to work, you need to use that space in your residence regularly and exclusively as the principal place of business for your rental activities.
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This sounds hard, and it was hard—before lawmakers changed the rules to include, as a principal place of business, the space you use for administrative or management activities, provided there is no other fixed location where you conduct substantial administrative or management activities.

Home-Office Deduction

Establishing a rental property home office does two things to your household expenses:

  1. Turns non-deductible household expenses into tax deductions.
  2. Moves household expenses normally deductible on Schedule A to your rental properties on Schedule E.

The latter is especially important after passage of the Tax Cuts and Jobs Act

  • put a $10,000 limit on your Schedule A state and local tax deductions, and
  • lowered the amount of your mortgage on which you deduct mortgage interest from $1 million to $750,000.

Eliminate Commuting

Without a qualifying home office, your mileage from home to your first business stop and then from your last business stop back home is non-deductible commuting mileage.

But here is what happens with the rental property’s principal office in your home:

  1. You have no commuting mileage from your home to and from your rentals, if the rentals are in the area of your tax home (say, within 50 miles).
  2. You establish your rental property tax home, and if your rentals are outside the area of your tax home, then the mileage from your home to and from the rentals is deductible business mileage because you are traveling outside the area of your tax home.

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Real Estate Professional

If you qualify as a real estate professional under the tax law, then you can deduct 100 percent of your rental losses in the year you incur them.

But there’s a big hurdle to the tax law classification as a real estate professional. You must show that you spend

  • more than 50 percent of your personal service work time in real property trades or businesses in which you materially participate, and
  • more than 750 hours of service during the tax year in real property trades or business in which you materially participate.

Having a rental property home office that qualifies as a tax-code-defined principal place of business makes it easier to qualify as a real estate professional, because your time spent on deductible travel to and from your rental properties counts toward the time requirements.

Claiming Your Deduction

The Schedule E instructions not only fail to provide any explanation about where to put your home-office deduction, but they also do not even mention a home office.

But the instructions do say that you can deduct ordinary and necessary business expenses, and the home office meets that rule. Also, as established in Curphey (a precedent-setting case), the home office is allowable as an expense against income from a rental business.

If you would like to discuss your rental properties with me, please call us directly at 855-743-5765. Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance
assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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How Serious Is your IRS Letter?

race
Has the IRS sent you a collections letter? How serious is that letter? Can you stroll to the phones, or do you need to break and run to the phones and call for help?

Listed below are the most common IRS collection letters that one may receive when they have tax debt. I’ve listed them in order from stroll to the phones (low detection on the IRS radar) to break and run to the phone lines & get help (requires immediate action).

CP14 – Casually stroll (No sense of real urgency).

CP501 – Put a little pep in your step (Take notice).

CP503 – Speed walk (Decide to do something).

CP504 – Start Jogging (things are getting very serious).
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Letter 1058/LT11 – (Final Levy Notice)—Run like you’re trying to lose weight. —act now or lose your collection due process rights (your right to a hearing and a stop of collection).

CP90/CP91 – Run like you’re trying to lose weight. Another form of Final Notice of Intent to Levy.

CP71 – 10 Day Final Notice of Intent to Levy. RUN LIKE YOU’RE BEING CHASED IN A HORROR MOVIE. Act now, you are out of time.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance
assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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Business Taxes, Family Taxes, General Information, General Tax Topics, retirement planning, Self Employed, Small Business, Tax Debt, Tax Deductions, Tax Planning, Tax Reduction, Uncategorized

401k For The Self Employed

solo 401k

You Don’t Have To Work For Others To Have A 401k Plan

In our Chicago South Loop tax preparation office, we often meet people that are ready to leave their jobs & start a new business.  If you’re new to entrepreneurship, or even a veteran (seasoned) business owner, you may not realize that you can start an IRS qualified retirement plan for your business. The best thing about a small business owners solo 401k is that if you’re leaving your old an employer, you can transfer your current 401k plan to your own company’s 401k!

Transferring your 401k to a traditional solo 401k will help you avoid LOSING YOUR INVESTMENT TO TAXES & PENALTIES! Don’t want to leave your employer? No problem! You can still have a traditional or roth 401k plan with your own company, as long as you don’t defer more than the IRS yearly contribution limit.

WHAT DOES IT DO? A traditional solo 401k allows you to exclude income from currents years’ taxes, and defer the income for taxation at a later time. Build your retirement income, and maintain access of up to 50% of the funds’ assets through loans.

WHAT WILL IT SAVE ME?  With the traditional solo 401k, you will be able to defer up to $56,000 of taxable income in 2019, and $57,000 in 2020. For example, if you generate $100,000 in business revenue, expenses, you would be taxed on the remaining $60,000. With a solo 401k, you can defer $19,000 as an employee of your company, and $15,000 for the employer contributions giving you a total deduction of $34,00 (leaving you with a taxable income of $26,000). By using this method you would remove yourself from the 22% tax bracket, and place yourself into the 12% tax bracket giving yourself a tax bill (including self employment taxes) of $4,650 instead of a $13,509 tax bill!

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WHAT CAN I INVEST IN? If you choose the traditional 401k plan, you will be able to invest in securities such as stocks, bonds, ETFs, commodities, and more. Should you choose a self directed Solo 401k, you can invest in things such as real estate, businesses, antiques, and more.

WHAT IF I HAVE OTHER RETIREMENT PLANS? Any contributions you make to other types of retirement accounts, such as IRAs, do not affect your 401(k) contribution limit.

WHY DO I NEED IT? Retirement plans are an important element of a tax reduction plan. While an IRA is a good plan, if you need to access your money, you will have to pay a penalty. Those that can, should have a mix of 401k and traditional and Roth IRA’s.

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Solo 401k Contribution Calculator: What is the maximum amount you can contribute?

The Solo 401k Contribution Calculator allows you to calculate the maximum amount you can contribute to your plan. Click on the link below, enter requested info below and click the “Submit” button to see your results. A PDF document will be generated with the option for you to save or print it. It is very important that you select the correct business type; please note that Sole-Proprietor is selected by default (if your business is a single member LLC, select the Sole-Proprietor type). For an alternative calculator click HERE.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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